America over barrel without comprehensive energy strategy

In his address to Congress January 6, 1941, Franklin D. Roosevelt spoke of “four essential human freedoms,” which he considered to be freedom of speech and expression, freedom of worship, freedom from want and freedom from fear. History teaches that freedom from want and freedom from fear derive respectively from national prosperity and its attendant — national strength.

The absence of a comprehensive diversified energy strategy places America’s security — and these four freedoms — in jeopardy. According to the Energy Information Administration (EIA), the U.S. consumes 25% of world oil production each year, with 68% of this used for transportation. The U.S. possesses only 3% of world oil reserves, however, and must import 56.1% of its petroleum products to meet demand. U.S. dependence on imported oil is expected to exceed 60% by 2020 — bad news for economic growth.

The U.S. economy grew in the first quarter of 2005 by 3.1%, in line with the 3% to 3.25% expected for the year. As a result of high energy prices this pace, favorable by historical terms, was 1.15% less than anticipated according to ARGUS Research. It could have been worse.

Due to the shift from manufacturing to services, America uses 50% less oil to produce one unit of GDP than it did 30 years ago. Other nations have not fared as well. According to the Organization for Economic Cooperation and Development (OECD), oil-importing developing countries use more than twice as much oil to produce a unit of GDP.

Notably, economists consider the incremental loss in GDP for each $10 price rise to be non-linear; i.e., a $10 rise from $45 to $55 is more damaging than a $10 rise from $25 to $35. Unlike the oil shocks of the ‘70s and ‘80s, the recent spike is due to increasing global demand, principally in China and India. Many believe oil will peg at the $50- to $60-level for some time. Although disconcerting, the effects of higher oil prices are not the principal challenge facing the U.S. and the world. At issue is a lack of energy security.

From there to here

The majority of oil consumption occurs in the industrialized West, while most oil production takes place outside it: the Middle East, former Soviet Union, West Africa and South America. The 11 members of the Organization of Petroleum Exporting Countries (OPEC) account for 40% of world oil production and approximately 67% of the world’s proven reserves. Current members of OPEC include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Saudi Arabia sits atop 25% of the world’s proven reserves. So the industrialized West and developing oil-importing countries depend heavily on undemocratic and frequently unreliable countries. If that weren’t enough, oil runs a gauntlet of risk en route.

The EIA has identified six oil transit “chokepoints,” geographic areas where disruption of the flow of oil could easily occur. Two thirds of the world’s oil moves by tanker ships, which have made intercontinental oil transport possible due to their comparatively low cost, scheduling flexibility and efficiency. However, the majority of the world’s oil moved by tanker must pass through two relatively narrow shipping lanes: the Strait of Hormuz and the Strait of Malaaca.

The Strait of Hormuz, located in Oman/Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. It is by far the world’s most vital oil chokepoint. The strait consists of two-mile wide channels for inbound and outbound tanker traffic and a two-mile wide buffer zone. Fifteen to 16 million barrels per day pass through this strait on its way to Japan, the U.S. and Europe.

Any disruption, even temporary, would require use of longer routes at increased cost. Moreover, these routes are incapable of replacing the daily volume that moves by tanker through the strait.

Piracy a regular occurrence

The 550-mile-long Strait of Malaaca is located in Malaysia/Singapore and connects the Indian and Pacific Oceans. It is the shortest route between three of the world’s most populous nations — China, India and Indonesia. Only 1.5 miles wide at its narrowest point, closure would require almost half of the world’s oil to transit by alternate route, absorbing all excess capacity and raising freight rates worldwide. More than 50,000 vessels transit the Strait of Malaaca each year.

While grounding, collisions and spills are a constant concern, piracy is a regular occurrence. In March, the strait experienced six incidents of piracy — attempts to either steal cargo or kidnap crewmembers for ransom. There were 37 incidents of piracy in the strait during 2004.

Piracy is of particular concern to Japan, which gets 90% of its oil through the strait and is entirely dependent on imported oil. On the night of April 5, 2005, pirates attempted to board the Japanese oil tanker Yohteisan, but failed due to increased speed and evasive actions ordered by the ship’s captain. Because of disagreements among countries in the area, attempts to plan and coordinate security patrols have foundered. Japan stated in March that it would supply Indonesia with two high-speed patrol boats to combat piracy in the strait and declared its intention to establish its own patrols if necessary. Many in the region, including China, consider the idea of a Japanese military presence an unwelcome change in the region’s strategic balance.

If these were problems of terrorism rather than piracy, an entirely different and far graver set of contingencies would be threatening. The point is this — any number of scenarios would be sufficient to send oil prices to $100 per barrel and the global economy into a nosedive. Though not too late, it is clearly time to act.

President Bush has been pushing for a comprehensive energy bill since 2001, but it took $55 per barrel oil to shake Congress into action. On April 21, the U.S. House approved an energy bill that extends daylight savings time by two months, opens a wildlife refuge in Alaska to oil exploration and, oddly enough, protects makers of the gasoline additive MTBE from product-liability lawsuits. It also includes $8.1 billion in tax incentives over 10 years, mostly for renewable and alternative energy. Some of these items will not survive, of course.

Whatever the final product, a comprehensive energy bill will be good news for the economy — and America’s security.

Thomas Howard is president of Trustmark Securities Inc. in Jackson. Contact him via e-mail at mbj@msbusiness.com.

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